What Is a Secured Creditor?
A secured creditor is any creditor or lender associated with an issuance of a credit product that is backed by collateral. Secured credit products are backed by collateral. In the case of a secured loan, collateral refers to assets that are pledged as security for the repayment of that loan. In the event that a borrower defaults on the repayment of a secured loan, assets are forfeited to the secured creditor.
Key Takeaways
- A secured creditor is any creditor or lender associated with an issuance of a secured credit product. A secured credit product is any credit product backed by collateral.
- In the case of a secured loan, collateral refers to assets that are pledged as security for the repayment of that loan.
- Secured creditors can be various entities, although they are typically financial institutions.
- Secured creditors may offer several different types of credit products with the option of securing these offerings through collateral. These products include personal loans,; institutional loans for businesses; and corporate bonds.
Understanding Secured Creditors
Secured creditors can be various entities, although they are typically financial institutions. A secured creditor may be the holder of a real estate mortgage, a bank with a lien on all assets, a receivables lender, an equipment lender, or the holder of a statutory lien, among other types of entities.
If a borrower defaults on a secured credit product, the secured creditor has a legal right to the secured asset used as collateral. The secured asset may be seized by the secured creditor and sold to pay off any remaining obligations. The pledged collateral adds a second source of repayment for the creditor, which means that there is a lower risk to the creditor for extending the offer of credit (this is also why interest rates may be lower for secured credit products and secured loans).
Secured Personal Loans vs. Secured Institutional Loans vs. Secured Corporate Bonds
While financial institutions may issue secured loans to both consumers and businesses, the type of collateral they accept depends on the borrower.
Many financial institutions offer consumers the option of secured personal loans. Common types of collateral accepted by secured lenders include real estate, cars, jewelry, and art. Secured personal loans generally have lower interest rates because they are backed by collateral (and thus pose a lower risk for the lenders). This typically results in lower interest rates for the consumer.
Secured creditors are given priority over junior creditors if an institutional borrower becomes insolvent. If a company liquidates, the collateral associated with a secured credit deal can only be used to pay off the secured creditors. Notably, the assumption is that the fair market value of the collateral is higher than the loan amount, but if it is lower, then thedebt is only partially paid. So, the risk profile is highly improved but not eliminated.
Businesses with a low risk of default may pledge various types of collateral in credit deals. This is to their advantage because it helps them obtain credit financing at the lowest possible interest rates.
Syndicated loans can also be structured to include provisions for collateral. With a syndicated loan, multiple investors participate in a structured loan. The company and its underwriters may use collateral to offer certain investors lower-risk terms (or the entire syndicate may be backed by collateral to comprehensively lower the risk for all borrowers involved).
In addition to personal and institutional loans, secured creditors may also offer corporate bonds as a type of secured credit product. Corporate bonds can be backed by collateral through certain loan provisions. As an investment, corporate bonds that are backed by collateral are considered lower-risk for investors. Corporate bonds are structured and issued on behalf of a corporation through an underwriter.
Special Considerations
In a secured credit deal, the contract terms typically include a provision that allows the lender to obtain a lien on the collateral property. A lien grants a lender the legal right to seize assets or property that have been designated as collateral in order to satisfy a debt if the payment terms are not met. A lien allows the lender to easily obtain legal approval from the courts to seize the property.
FAQs
Secured creditors can be various entities, although they are typically financial institutions. A secured creditor may be the holder of a real estate mortgage, a bank with a lien on all assets, a receivables lender, an equipment lender, or the holder of a statutory lien, among other types of entities.
What are the rights of a secured creditor? ›
Secured creditors have other rights in bankruptcy, including the right to receive postpetition interest, fees, costs, and charges and to receive adequate protection for any decrease in the value of their interest in the collateral resulting from any use, sale, lease, or grant of a lien.
What is an example of a secured creditor? ›
Examples of secured creditors
Banks (these are the main source of secured creditors) holding fixed charges on business assets, including property. Lenders that hold a charge over any assets held by a company, such as machinery, workplace equipment and the company inventory.
What are creditor's rights examples? ›
Creditor's rights can refer to many different aspects of creditor-debtor and creditor-creditor relations including a creditor's rights to place a lien on a debtor's property, garnish a debtor's wages, set aside a fraudulent conveyance, and contact the debtor and relatives.
What is secured debt in law? ›
If you have pledged property as collateral for a loan, the loan is called a secured debt. Examples of secured debt include homes loans and car loans. The loan is secured by the car or home, which means that the person you owe the debt to can repossess the car or foreclose on the home if you fail to pay the debt.
What are the options for a secured creditor? ›
Secured creditors have the right to enforce their security in the event of default by the debtor. This involves seizing and selling the debtor's assets to recover the debt. The right to implement security is a powerful tool for creditors, providing them with a direct means of debt recovery.
What are the remedies for a secured creditor? ›
Broadly speaking, in exercising remedies, a secured party may notify account debtors to make payment directly to the secured party if the collateral consists of accounts or certain other rights to payment, may apply funds on deposit in deposit accounts, may repossess collateral, may accept collateral in full or partial ...
What is an example of a secured credit? ›
A common example of a secured line of credit is a home mortgage or a car loan. When any loan is secured, the lender has established a lien against an asset that belongs to the borrower. With mortgages and car loans, the house or car can be seized and liquidated by the lender in the event of default.
How does one become a secured creditor? ›
It is very easy to become a Secured Creditor. Just obtain a Financing Statement aka UCC-1, follow the UCC-1 instructions sheet and then record it with the Secretary of State's Office in the state where the debtor has its principal office.
What is an example of hindering secured creditors? ›
For example, suppose that David got a bank loan to buy a car. He was unable to keep up with the payments so the bank demanded the he turn over the car to them. David then drives the car to his brother's house in another state so that the repo men can't find it. David may be charged with hindering a secured creditor.
They describe a relationship where one party owes money to another party. The debtor is the party that owes the money (debt), while the creditor is the party that loaned the money. For example, if Jay loans Reva $100, Reva is the debtor and Jay is the creditor.
What are some examples of creditors? ›
What is an example of a creditor?
- Friend or family member you owe money to.
- Financial institution, like a bank or credit union, that extends you a personal loan, installment loan, or student loan.
- Credit card issuer.
- Mortgage lender.
- Auto dealer that extends you a car loan.
If the judgment debtor files for bankruptcy, the judgment creditor may be classified as an unsecured creditor. The bankruptcy code determines the order of payment in bankruptcy proceedings, and secured creditors usually have priority over unsecured creditors.
What is a secured creditor in simple terms? ›
A secured creditor is any creditor or lender associated with an issuance of a credit product that is backed by collateral. Secured credit products are backed by collateral. In the case of a secured loan, collateral refers to assets that are pledged as security for the repayment of that loan.
What is true of a secured creditor? ›
Secured Creditors are creditors that hold a lien on its debtor's property, whether that property is real property or personal property. The lien gives the secured creditor an interest in its debtor's property that provides for the property to be sold to satisfy the debt in cases of default.
Which of the following are examples of secured debt? ›
The two most common examples of secured debt are mortgages and auto loans.
What happens to secured creditors? ›
A secured debt is a debt tied to a particular asset, e.g. car or home loan. Bankruptcy does not change your rights as a secured creditor. You are still able to pursue the person for payment of the debt. You may repossess and sell the secured goods if the person is unable to maintain repayments.
What are the benefits of being a secured party creditor? ›
By securing your assets and leveraging your creditor status, you open up a world of opportunities for financial growth and prosperity. Whether it's investing in real estate, starting a business, or expanding your portfolio, being an SPC gives you the confidence and security to pursue your financial goals with vigor.
Why is a secured creditor entitled to adequate protection? ›
Adequate protection is a remedy used to compensate secured creditors for the loss in value of their collateral caused by the automatic stay, which occurs as a result of a bankruptcy filing. It is also used to protect secured creditors against loss caused by the use, sale, or lease of their collateral.
